SkyWest Inc (SKYW) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the ExpressJet fourth-quarter '08 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Miss Kristy Nicholas. Miss Nicholas, you may begin.

Thank you, Michelle. Good morning, everyone, and thank you for joining the ExpressJet Holdings fourth-quarter conference call. On the call we have Jim Ream, President and Chief Executive Officer, and Phung Burns, Chief Financial Officer.

Portions of this call may contain forward-looking statements not limited to historical facts but reflecting our current beliefs, expectations or intentions regarding future events. A number of factors could cause actual results to differ materially from those in the forward-looking statements. Additional information concerning risk factors that could affect our actual results is described in our filings with the SEC, including our 2007 10-K.

During this call certain non-GAAP financial disclosures may be made relating to or performance measures. In accordance with SEC rules, we will provide a reconciliation to our most directly comparable GAAP financial measures on our website at www.ExpressJet.com. Jim will cover the operating and financial results for the quarter, then he will take questions. Now I'd like to introduce Jim Ream.

Thanks, Kristy. Good morning, everybody. Reported in the quarter a loss of $30.2 million. We had one big unusual item that I'll spend just a second talking about and then kind of talk about the ongoing business.

We had to take a $22 million tax adjustment related to writing down the deferred tax asset that we had, primarily on the limitations imposed by triggering the change of control provision within Section 382 and all of that kind of driven with the partial redemption of the convertible notes in August. Of the $22 million, we've got $19.3 million, which is a balance sheet entry, it will be a non-cash adjustment to the balance sheet. We had to do a three-year look back and go back and kind of compare the returns now back to '05.

There's a -- we've got a little bit of a cash adjustment that we're going to have to make that makes the balance of that $22 million, but we think we've got the balance sheet now cleaned up, based on a fairly technical interpretation of the tax code and related to the change in control under 382. And obviously, we had a fairly dramatic change to the balance sheet on the convert redemption. And so we've got that kind of done and behind us and we shouldn't have to talk about that going forward.

When you look at the run rate basis on a pretax basis, we ended up with a loss of $14.7 million. That's an improvement year-over-year of $33.7 million. On the revenue side we've got 214 aircraft working for Continental Airlines. Obviously, the utilization on those aircraft is historically low right now just based on the demand levels for travel out there both in the fourth quarter and it's going to be the same here in the first quarter as well.

Our utilization is down just like Continental's, just really like every carrier has got their aircraft line with the least amount of hours possible, just trying to match capacity with where demand is at this point in time. The comparison last year in '07 we were flying 205 aircraft nine hours and 20 minutes. So when you look year-over-year just on the Continental Express side, we're down 10.6% in block hours and down really 8.5% when you look at the third quarter where we were -- versus the fourth quarter.

Revenues for Continental Express on $142 million. The year-over-year comparison is not particularly meaningful, but if you really look at where the $142 million is versus the third quarter, down from the third-quarter capacity purchase revenues of $35 million, there's some Delta in there, but if you just look at the Continental Express side, we're down about $20 million in revenue from where we were in the third quarter versus the fourth quarter.

On the charter side revenue was $8.4 million, an improvement year-over-year of 42%. Again, that business just continues to grow and this is obviously a very difficult economy to try to make that business work. But we've been happy with the progress we made in the fourth quarter. And when I look at the first quarter I can see the same kind of similar growth patterns there. So it's tough sledding right now in that arena, but we have been able to kind of make some fairly compelling value propositions in that area and we continue to see that grew nicely.

On the expense side -- fairly dramatic shift. Obviously, we had to pull a lot of expenses out here in the fourth quarter given the changes and what's going on and, most importantly, with system block hours down 32.5% year-over-year. If you look at the expenses, back out fuel and aircraft rent in both '08 and '07 to give you -- backing out the contractual differences of one P&L versus the other and just look at the expenses that we can manage the expense base is down 45% from where we were in the fourth quarter of '07.

On the cash side we ended up with $119.4 million. That's down from the third quarter of $25.9 million. We had talked about on last call that we had some cash payments to make in the fourth quarter related to the restructuring charges that we took in the third quarter based on shutting down branded and pulling out of our Delta operations.

We thought we'd be in $8 million to $10 million range there on cash out, but it was actually $8 million in the quarter. We've probably got about $4.7 million left on cash payments under what we've already written off, and probably most of that will be done in '09.

We spent $10.1 million on securities repurchased. We retired $7.6 million of debt and now we have the convertible note balance down to $60.8 million at the end of the quarter. We also bought 3.1 million shares in the quarter and we have a year-end share count outstanding of 17.7 million shares. We had $1.6 million in CapEx. We had some more debt retirement on our ADC payments of $1.1 million.

We also wrote down our auction-rate securities to kind of reflect where the market is right now. We took a $2 million charge to cash on that. So you're kind of left with about a $3 million cash impact from third quarter for our operations of the fourth quarter. $2 million of that is some timing on working capital and about $1 million is coming off the P&L.

So with utilization where it is, still growing the charter business, obviously we've still got some work to do off the P&L, but we're probably going to be in this breakeven point given, again, where the economy is right now, where the demand for travel is, and just basically when you look at the overall industry, I think everybody is in fairly similar circumstances.

So the first quarter is going to be very similar to the fourth quarter, just utilization on the aircraft, where we are in block hours and right now we don't have enough visibility on the second quarter. I think everybody is sort of trying to wait and see -- does demand start to return in that second quarter? If it does, we obviously expect an improvement in our overall utilization of the aircraft and should see a corresponding improvement off the P&L that you're seeing here right now.

So that's an overview. Michelle, we can take some questions.

(Operator Instructions). Bob McAdoo, Avondale Partners.

Thanks. Hi, guys. Questions, obviously the real challenge here is to try to figure out how long it takes you to get to breakeven. And so as we look at the expenses for the fourth quarter, I'm trying to figure out -- are there any lines among the operating expenses where we have special -- or items which would not be recurring?

For example, in maintenance with the conversion of the airplanes, are there extra expenses there? Is your depreciation, this 8144 number, is that likely to be kind of a similar ongoing number? Or any other places in there where we've got some things where we can see that it's fairly straightforward that your ongoing operating expenses are going to come down some?

Well, you've just got the million that you can look at there with the impairment of the fixed assets in the special charges. Obviously, that's not an ongoing -- that comes off. Really, Bob, probably the only expense item that we have right now is obviously our average seniority of our folks is increasing fairly dramatically from where it would have been just say in the spring of this year.

So we're mostly -- that's our biggest expense item are the folks that we have flying our aircraft, working on the aircraft, running the airport. And just typically in our sector we're going to have folks who have career pursuits that sort of drive them off to work at other carriers as those opportunities present themselves.

The slow down both in the utilization of our aircraft and with every airplane operator out there not really adding anybody, you were clearly seeing a lot of pressure there that we would expect just unwind on us once the industry starts returning to normal. So that's a big thing.

The only other item we've got, we've got two months of our pay cuts in here, so there's probably another $1.5 million to $2 million improvement that would come in expenses if you looked at a full three months of those being implemented for a full quarter. But the real leverage point here on the expense side is really going to be on the utilization side. All the fixed stuff is fixed, folks start getting used more, we're going to have folks that have career pursuits that sort of drag them out the door and we can start bringing people in and drive down that average seniority.

But as we look forward then, this roughly $8 million a quarter depreciation, there wasn't anything special there, so that's a number that we could probably go straightforward with?

Yes.

And something in the range of $35 million to $40 million in maintenance going forward. That's kind of what the run rate is likely to be going forward there too? There weren't any special things there?

That's correct.

Okay, and then from a tax rate point of view, obviously you had this little issue with that special provision in the tax code there. What kind of a tax rate should we be thinking about going forward?

We really don't have a lot of permanent differences in here, so I think you're going to be pretty close to the statutory rate. That's the way I would model it.

Okay. And then one other thing. The new contract with Continental, you're down to eight hours of utilization. If they decide to squeeze it down more, is there any provision -- like some guys have a provision to say you get below a certain level, we can readjust because you're -- you've got us at a level that's uneconomic where we can adjust the rates. Or is this kind of they have flexibility to take you down even more if they really felt they had to?

We have kind of a baseline level of block hours that sort of supports kind of where we are right now. Obviously, the spirit of the agreement is that as they have to adjust their own fleet they should have the flexibility to adjust ours as well. So how their domestic system operates is what we would expect on our side. It just doesn't make sense to fly our aircraft into empty bank structures. So as they set the whole bank structure, whatever they need to do to be successful on their side they have the flexibility to do with our aircraft on our side.

There's not an automatic, oh gee, you're down below eight, so therefore you've got to adjust our rates or anything?

That's correct.

Okay, all right. Thanks.

[S.T. Tallapragada], Quattro Global.

Hi, just a couple of really quick questions. The restricted cash, can you just review what the components are of the restricted cash balance?

The lion's share of it is provisioning for worker's comp, so that's going to be 80% of it. We've got a line of credit out there that backs up the EDC, that's a fairly small amount. Some very slight amounts remaining on some bank card holdbacks that are going to be cleaned up here very quickly.

But worker's comp is our big one and obviously that's kind of based on last year's experience in the first half of the year. We would expect to start getting some relief on that as you kind of look at sort of where we are in staffing levels right now and the experience that we're observing here through the winter. So I think that's going to get a little bit better, but that's the big one.

Okay, and what is the remaining cash that's authorized -- that you have remaining that's authorized to buy back securities?

$10.1 million.

Okay, and you said that the share count at the end of the year was 17.7 million. Can you say if it's -- what the current share count is? Have there been buybacks since the end of the year, or can you not disclose that?

Well, we've been out of the window once we crossed the year end as we're getting close to closing the books, so we have not been in the market after year end.

Okay, great. And finally, can you just talk generally about your outlook for growing the charter business in the coming year?

Well, my outlook is mixed. I can see what I can see in the first quarter. I'm pretty happy because it's going to look similar to what we've kind of experienced in the fourth quarter, so it's growing nicely. Clearly the people that we're chatting with and where we think that we've got an opportunity to add some value, those conversations are just taking longer because they're under budget pressures or they're sort of thinking about changing their business and what they're doing.

And so the sales cycle is just longer as you're working through kind of the specialty solutions that you need to put together to make this a real business. And that's just generally what you'd experience I think in every business in the economy. We're just in the economy right now with this particular product offering and so it's moving just as slowly as everything else is in the economy.

Okay, thank you.

(Operator Instructions). Kimberly Sales, Stelliam Investment Management.

This is Ross Margolies. Two questions. First, the operating cash flow breakeven that you had the last two months of last year, will that be able to continue or do better than that through 2009?

The forecast would be similar for what we experienced because we're really kind of forecasting right now that nothing improves from a utilization standpoint. There's a little bit of improvement just based on kind of that normal increase in flying that you would see in the summertime, but nothing that would look like where we were flying in the spring of '08. So just assuming that we're in the same world we're in right now, that's our expectations based on what we saw in November and December.

So basically you've gotten -- November and December you got yourself to slightly positive on an operating cash flow. And if things were as bad as they were in November and December, your run rate plus or minus should be similar to that?

Correct. And when you say slightly cash flow positive, you couldn't say it slightly enough. So --.

Positive is better than negative.

Positive is better than negative, yes, sir.

Second, will you be able to use any carry back from losses generated subsequent to the August 1, '08 restructuring to generate any tax refunds going forward? Or do you expect to get any tax refunds going forward if you're running at the same operating loss rate on an operating basis?

We're kind of going through that analysis right now. There is going to be some carry back we can do. Obviously less based on sort of having to write down this deferred asset, but there's a little bit -- going forward, none.

So any losses generated post August 2008 can only be used to generate -- offset -- is that -- I guess the question is, is August 2008 a cut-off date for when you can generate losses or not? Are you still going through that now?

We're still working through that right now. We've got to go back -- we're going to have to file amended returns for '05, '06 and '07, so we're doing that right now as fast as we can. Because obviously there's that three-year look back and as you go back, there are complexities around a lot of folks coming and going out of ownership positions in this company as far back as the spring of '05. And those 13 filings, they can happen and then they get amended and wherever you thought you were you need to go back and say what did really happen and that's kind of what we're cleaning up right now.

Thank you.

Bob McAdoo, Avondale Partners.

One more thing. As we think about charters in the first quarter, is your fleet such that it's attractive for NCAA basketball charters? Do you have any shot at getting any kind of a bump there?

Yes, we will generate more revenues in the first quarter based on the fact that that's a busy season for us. As you mentioned, the NCAA schedule and how those teams move, fits kind of perfectly with this aircraft.

Okay, I was just curious. Thanks.

We have no further questions at this time.

Okay. Thank you, Michelle, and thanks, everybody, for joining us today. Look forward to chatting with you in 90 days. Good morning.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may all disconnect.